An Introduction to the Commodity World

The commodity market is one of the fastest moving financial markets in the world. Many traders get involved in the commodity market in an effort to diversify their investments and pull away from the stock market. Here are the basics of the commodity world and how it could benefit you as a trader.

Commodities

Commodities are the physical things that we use on a daily basis. For example, a commodity can be referring to agriculture products such as corn, wheat, soybeans or sugarcane. You could also be referring to precious metals such as gold or silver. Many commodity traders are also involved in the oil market as well. There are many different commodities that can be traded. 

Trading Commodities

The primary source for trading commodities is a commodity exchange. This is somewhat like a stock exchange because it is where traders get together and buy and sell contracts. Some of these can be accessed online. In addition, you can also buy futures contracts on these commodities. For example, let's say that you think the price of oil will increase in the next six months. Therefore, you buy a futures contract based upon today's pricing, but you do not take physical delivery of the oil. Then at some point before the contract expires, you sell the contract to someone else at the current market price. You have then realized a profit between the two prices.

Commodity Stocks

Another way to get involved in the commodity market is to purchase commodity stocks. This is an indirect way to speculate on commodities because you are investing in companies that deal with commodities, instead of the commodities themselves. With his method, you will not experience as much volatility in your investment because you can deal directly with the stock market. You will still experience diversification because commodities are a separate category.

Commodity ETF's

In addition to stocks, you could also trade ETF's that work with commodities. This is a more diversified approach to getting involved in the commodities market because the ETF will usually invest in a variety of different stocks and securities. With this method, you will also be able to deal directly with the stock market and keep your same brokerage account.

Volatility

If you are going to invest in the commodities market, you will need be comfortable with volatile price swings, from time to time. Since you are investing in physical commodities that could be limited, supply and demand will play a huge role in the overall value of the asset. For example, an entire crop of an agricultural commodity could be wiped out due to a storm or late freeze. This can have a drastic effect on the price of that commodity in the market place. As an investor, you need to plan ahead for these wild swings in price.

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